President Obama stated recently that he wants to make America the “best place on Earth to do business.” It wasn’t that long ago that America was the best place on Earth to do business. Somewhere along the line, we lost our way.
Case in point: In 1960, 17 of the world’s 20 largest companies were headquartered in the United States. That total fell to 13 in 1985. Today, only six of the top 20 companies are based here.
Certainly there are factors beyond our control, such as the dramatic economic growth in Asia, that pose new challenges to U.S. economic leadership. However, the steep decline in the number of the world’s largest companies headquartered in the U.S. is emblematic of problems that go much deeper. Simply put, there are other factors creating a drag on American competitiveness that we can control, and simply haven’t.
Of major concern is the U.S. tax system — which has become an outlier relative to other advanced economies. U.S. companies are taxed at a significantly higher corporate rate than in other nations, and the U.S. tax rates on foreign earnings is significantly higher than that faced by foreign competitors in their home countries. In combination, these factors disadvantage American companies as they seek to compete with their foreign-headquartered competitors in markets around the world.
So it is refreshing to hear talk from both Democrats and Republicans about the need to make the U.S. tax system more competitive. Done right, reform of the U.S. corporate tax system can enhance the competitiveness of American companies, give a boost to the U.S. economy, and spur job creation.
Lest anyone wonders why U.S. global competitiveness is important, consider that American companies with operations both at home and abroad are responsible for 63 million U.S. jobs. These companies directly employ 22 million American workers and they create an additional 41 million American jobs through their supply chains and the spending by their employees and their suppliers.
The typical American company with international operations buys $3 billion in goods and services from more than 6,000 American small businesses. Cumulatively, worldwide American companies purchased $1.52 trillion in supplies and services from U.S. small businesses in 2008.
Therefore, corporate tax rates and U.S. competitiveness do matter — and not just to big business.
With 95 percent of the world’s population living outside the United States, it is essential to the growth of the U.S. economy and the prosperity of American workers that American corporations are able to operate in international markets on a level playing field with their foreign-headquartered competitors.
Today, the combined corporate tax rate in the United States is 39.2 percent — the highest (after Japan) among the 34 countries of the Organization for Economic Cooperation and Development (OECD), fully 14.1 percentage points above the average tax rate.
The United States is also one of the few remaining advanced economies that taxes its companies on their active foreign earnings when remitted home. All other G-7 countries and most other OECD countries have adopted “territorial” tax systems that largely exempt these earnings from home country taxation. The United Kingdom and Japan both adopted territorial tax systems in 2009 as a way to help their companies compete — and to grow their economies and create more jobs.
Some will say that the complexity of the U.S. tax code allows for deductions that keep U.S. companies taxed at a rate comparable to foreign competitors, and that “effective” rates, therefore, are much lower than the statutory rate. A new study by PricewaterhouseCoopers for Business Roundtable, however, shows that from 2006-2009, companies headquartered in the United States faced an average effective tax rate of 27.7 percent compared to a rate of 19.5 percent for their foreign-headquartered counterparts. By country, U.S.-headquartered companies faced a higher worldwide effective tax rate than their counterparts headquartered in 53 of the 58 foreign countries.
Surely, taxes are not the only issue impacting American competitiveness. It will take a concerted effort, on many fronts, to regain the competitive advantage that as Americans we took for granted for too long.
Establishing a competitive corporate tax system, however, is probably the single most important thing we can do to ensure future U.S. economic growth. It is long overdue — and would go a long way towards making America once again the best place to do business.
Governor John Engler is the President of Business Roundtable and a former governor of Michigan.